Seminario: "A new supermarket in the neighborhood: The price reaction of incumbent retailers"

This paper studies empirically the volatility of retail price indexes at the store level as a result of changes in the local market structure within an urban market. Using a reduced form pricing equation, the standard approach bases the analysis of a potential competition effect on the number of firms in the market at a certain point in time. We decompose the competition effect in the effect of incumbent retailers and the effect of new grocery store openings. Considering the Spanish supermarket industry, which is strongly regulated, we make use of panel data and use a first-difference approach to estimate a distributed-lag model. The results suggest an instantaneous price reaction to entry which is smaller than the long-term competition effect of an incumbent firm. Possible explanations are constrained price- flexibility for incumbent firms in the short run or diffculties of the entrant in establishing themselves as coequal rivals. We find that this gradual price reaction is especially pronounced for supermarkets positioned in the middle price-segment, and the strongest price reaction has been found for high-price retailers.